Maltese Trading Company
The Maltese trading company has established itself as one of the most easily accessible and flexible vehicles for savvy and new investors alike. With its flexibility, unmatched fiscal advantages, white-listed status, access to white series of double tax treaties, it is now a cornerstone in most tax planning structures.
At the outset, it is important to establish which are the fundamental characteristics that a company should satisfy, in order to be the designated vehicle of choice, for investors. The following are the core requirements, which shall be dealt with, in greater detail below:
- Tax Efficiency;
- Access to Double Tax treaty provisions;
- Reputation – wide scope of use;
- Easy access / tried and tested legislation;
- Effective Asset Protection Tool;
Tax efficiency is often the main driver behind the choice of a jurisdiction. In this respect, the Maltese company can certainly claim to be amongst the most tax effective jurisdictions, whilst preserving its status as an onshore, EU-regulated vehicle.
The Maltese tax system is a credit imputation system. Long-entrenched in the Maltese fiscal system, a remnant of its British colonial past, the Maltese system is a credit imputation system. The corporate tax rate is a standard 35% (which would on paper, not pitch Malta as the most favourable tax rate), however, upon a final distribution of dividends, shareholders are entitled to a number of tax refunds, the default being 6/7ths of the 35%. This effectively leads to an ultimate tax leakage of just 5%.
The tax refund shall depend on two main factors: (i) nature of the income – e.g active trading or passive interest; and (ii) classification of income into the tax accounts of the Company.
As discussed, the default tax refund is 6/7 of the corporate tax rate of 35%. However, other forms of refunds are possible, such as:-
- 100% refund (in the case of holding companies qualifying for the participating holding);
- 5/7 refund in the case of companies receiving passive interest; and
- 2/3 refund in the case of companies evoking the double tax treaty provisions
For a full understanding, with working illustrations of how the tax refund works please click on this url: tax refund explained
It is often a common query from clients, as to the rationale of the double tax refund. If the effective tax leakage is 5%, why undertake this tax refund mechanism in the first place? Would it not be simpler to simply apply a 5% tax rate to the taxable income of the company?
The aforesaid are legitimate queries in their own right, and indeed it is fair to say, that Malta did undertake a short stint in which the tax refund was shelved and an immediate taxation applied. However, this novelty was short-lived, primarily on two main reasons:
- The credit imputation had always made a distinction between the corporate tax rate and the tax refund, which is not provided to the company, but to the immediate shareholder of the Company. With a tax rate applied directly to the Company, the shareholder would effectively lose this right to a tax refund, which with the repatriation of funds to his country of residence, may have a material impact to his tax structure;
- Revocation of tax treaties. Several jurisdictions reacted negatively to the application of an immediate low tax rate – effectively branding the island an offshore tax haven. The credit imputation system solved this impasse, since as discussed the effective tax rate is always 35% (which is an acceptable tax rate and does not violate the CFC rules of most tax treaty partners), whilst allowing the shareholder to invoke tax treaty provisions to lessen this tax burden in a perfectly legal and legitimate manner.
The plans to remove the credit imputation system were therefore shelved, and the credit imputation system restored. The aforesaid system is now once again a cornerstone of the Maltese tax system, and has been subjected to a review by the EU Commission, as a condition precedent to the island’s accession to the EU. The EU Commission has scrutinised and effectively sanctioned the Maltese credit imputation system, and this is a pivotal accreditation, since it cements, beyond any legal challenge, the legitimacy of the system.
Access to Double Tax Treaty Provisions
A corollary of the aforesaid point – tax efficiency is the need to have a widespread double tax treaty network. Tax treaties are effectively law, which rank higher than any municipal law. Negotiations are often long and tortuous but once established, they effectively create a very important and conclusive legal framework, which sets clear and unequivocal rules on how contracting parties will treat income deriving within their respective jurisdictions, by a respective tax subject.
Tax treaties have the hallmark of international law, and therefore rank higher than any purely domestic law. Although most treaties, will follow the standard OECD model – with few derogations to the standard text – these derogations may be material and highly important.
Usually used to set rules on the following tax principles of income, royalties and interest, other provisions which are of particular interest to the investor include the following:
- Tax treatment of director’s fees;
- Definition of what constitutes (or does not constitute) a permanent establishment;
- Different tax rates which may apply on dividend income, depending on the percentage equity which is considered to constitute a majority shareholder and a minority one; etc
It is therefore clear that having a widespread network of tax treaties is essential, since this gives a comprehensive and certainty to the investor, who can effectively plan his tax structure, in such a manner as to seek the most tax efficient solution possible.
Malta has spared no diplomatic efforts in finalising a series of tax treaties (as of the date of writing – the number is in excess of fifty (50) treaties, and more importantly, the geographical scope of the double tax treaty provisions, particularly in the light of emerging powerhouses in Asia and South America.
Malta has in fact concluded double tax treaties with virtually all its EU counterparts, the USA, China and several North African countries. Recently, it has signed but not yet ratified, double tax treaties with the Russian Federation and Turkey (two emerging economic powerhouses) and sought to bolster its position in Central and Latin America (concluding double tax treaty provisions with Mexico and Uruguay).
Apart from the double tax treaty provisions, Malta also has the concept of unilateral tax relief (which seeks to avoid the duplication of tax payment in more than one jurisdiction – in the same manner as the double tax treaty provisions would – albeit in a voluntary and one-sided dimension – strictly Maltese tax), as well as Commonwealth tax relief – which gives Malta valuable tax relief to all Commonwealth Countries (including India, Pakistan and Nigeria – the combined population of Commonwealth countries is 2.3 billion).
All these factors therefore make Maltese a serious proposition that is attractive of effective tax planning and structuring, and a serious world player.
Tax efficiency and access to a wide network of double tax treaty provisions are important. However, so is flexibility of use. A company may have access to highly effective tax efficiency tools, but all of this could be shackled by severe and cumbersome bureaucratic processes. It is therefore important that the company be able to undertake internal decisions swiftly and in a clear and unequivocal manner, and that these decisions be crystallised by a swift and efficient registry of companies. Time-lags can hamper, and effectively annihilate all advantageous, and therefore, the impact of the aforesaid bureaucratic protocols, is not be to be underestimated.
In this regard, the Maltese company scores very highly. At the outset, the Maltese system, draws significant influence on the Companies Act of England and Wales. This gives the island significant clout, since it is effectively able to absorb and replicate a system that has been highly respected, very often as the benchmark and acceptable standard of quality. Promoters familiar with the common law precepts can relate easily to the Maltese system, allowing them to draw often very accurate analogies between the Maltese jurisdiction and the jurisdiction of residence of the promoters.
The Maltese company is an onshore jurisdiction and therefore probity is an inderogable hallmark for its incorporation. However, this scrutiny does not come at the expense of swift deployment. Suffice it is to say, that the incorporation of a company may be expedited within as little as twenty-four hours from the submission of all documentation to the registrar of companies.
The shareholder of the company (called subscribers) can empower third parties by means of a power of attorney to sign off the Memorandum and Articles of Association (the company by laws) in their stead.
Furthermore, changes to the company, such as change of address, change in directorship, company secretary and shareholder can be expedited by mere written resolution, which does not require the updating of the company‘s Memorandum and Articles of Association.
Even changes which require the updating of the Memorandum and Articles of the association (extraordinary resolutions) such as the change of name of the company, increase of the authorised share capital, or reduction thereof to mention but a few, may be expedited by simple written resolution.
Importantly, and contrary to other jurisdictions, the Maltese company law does not prescribe the need for a notarial system. The incorporation of the company and underlying changes may be expedited without the need of a notary public, but by direct written resolution of the two main organs within the company, the general meeting (shareholders) and the board of directors. This provision comes at a consideration saving in terms of fees and time.
Reputation – Wide Scope of Use
Another important hallmark to consider is ensuring the widest possible reach and scope of the company. It is of little use, if the company, once incorporated, at the expense of the shareholders, is unable to trade, because it is not internationally recognised due to fiscal and international restrictions.
Jurisdictions may apply a series of criteria such as CFC rules or thin capitalisation to name but a few, to effectively curtail the use of a company. Black lists may be enacted, effectively meaning that companies incorporated in black listed jurisdictions will not be recognised for international trading (e.g. non-acceptability of invoices) or see-through provisions, with the resident beneficiaries subject to direct and personal taxation (effectively rebutting the company as a separate legal person).
Offshore companies often bear the brunt of this black-list, seen as excessively lax and with no real substance. Companies incorporated in black-listed jurisdiction are severely shackled in their scope. Invoices issued by companies incorporated in these black listed jurisdictions to onshore companies, will for example be disregarded and refused outright.
It is therefore important to choose a company incorporated in a company which enjoys a limpid reputation as this shall ensure the widest scope of use of the company.
Another hinderance to scope of use is the one associated to bearer shares. Typically associated with offshore jurisdictions, bearer shares are precluded by the Companies Act, to the extent that the prohibition to issue bearer shares is expressly included in the Memorandum and Articles of Association of the Company.
Bearer shares raise due diligence issues (it is effective difficult to ascertain to a certainty who the ultimate beneficial owner is/are – since the beneficiary is determined by the holder of the share certificate) – without any objective evidence thereof in the company registry or the register of members of the Company. Consequently, companies with bearer shares face stiff challenges to open a bank account, since financial institutions, rightly, find their use incompatible with the due diligence protocols. This hinderance, will therefore inevitably and significantly curtail the use of the company.
A Maltese company suffers no such set-backs. Bearer shares are precluded, with all shares being registered ones, the holder of which has to be recorded in the registry of members of the company. This allows a Maltese company to have widespread use. Confidentiality of the beneficiaries vis-à-vis third parties may still be retained through the use of fiduciary shareholders.
Our firm is a licensed fiduciary company, which may act in such a capacity, thereby allowing full confidentiality to the beneficial owners. However, when acting in such capacity, the identity of the beneficial owner will still be determined via express deeds, entered between our firm and the beneficial owner, with an irrevocable undertaking that the transmission of the shares by the beneficial owner, must under pain of nullity be communicated to our firm.
All this measures, have ensured that a Maltese company enjoys an unblemished reputation, and consequently offer the promoters thereof unlimited access to treaties and scope of use. It is significant to note, that Maltese companies are entirely white-listed, and in full adherence to all FATF anti-money laundering guidelines. However, the opportunity cost of such adherence is not incompatible with a low rate of tax – as set forth above.
Easy Access / Tried and Tested Legislation
All the aforesaid factors are important. However, all of this could be undermined, simply by having obstacles to the incorporation of the Company. The nature of the hinderances may vary, but are typically of a statutory / bureaucratic nature. A few examples abound:
Share Capital Requirements
An excessively high share capital, for example, can be cited as one such example of these obstacles, since it is effectively placing the corporate tool out of reach and grasp of ordinary subscribers. A low share capital therefore, ensures a wider audience, by allowing a mixed influx or ordinary and institutional investors. It is worth noting that the minimum authorised share capital for a Maltese company is EUR 1165 (often rounded up to EUR 1,200 for ease of division) – and equivalent in any other currency. Just 20% of the authorised share capital needs to be paid up i.e EUR 233 (or equivalent in any other currency. The threshold for public companies is of approximately EUR 46,600 (or equivalent in any other currency) with a minimum paid up threshold of 25% – i.e. EUR 11,500. It is therefore beyond doubt that the thresholds are therefore accessible to the proverbial man on the street.
Upkeep of the company
The upkeep of the company is also an important decision for the investor. High maintenance fees, typically registration fees and annual return fees (or its equivalent) are undeniably obstacles to the incorporation of the company, especially once again for ordinary investors. Regulators are minded to find a workable point of balance between what is the inevitable allure of high fees (to cover bureaucratic expenses) and attractive volumes of investors (with the added benefit of spreading the risk between a higher number of companies). It is true to say, that regulators have in mind the ‘incubator’ effect – that easy access to the registry of companies – will inevitably yield long-term benefits, as inevitably some of the smaller players will morph into success stories. It is therefore important to attract players, whilst ensuring that the highest standards in probity and assurance are maintained at all times.
In this regard, the regulator has found this balancing act. The registry fees payable (as of June 2014) for a limited liability company with a minimum share capital is of just EUR 245. The annual return is of EUR 100 per annum. Even at the highest end of the spectrum, the capping is kept to a very respectable EUR 2,250 application fee and EUR 1,400 annual return (in both cases for a company with an authorised share capital exceeding EUR 2.5million – or its equivalent in any other currency).
The same logic has been retained for the request of additional information, which may be required during the life of the company – such as the issuance of additional copies of the Memorandum and Articles of Association, copies of certificate of incorporation, certificates of good standing and copies of the submitted audited financial statements of the Company. All of the aforesaid, after routine requests, that the subscribers may face, to carry out standard additional tasks, such as opening a bank account or registering a branch or subsidiary of the company, request for VAT number / EORI number (for customs) etc;
The Maltese registry of companies is a success story in this regard, combining reasonable registry fees with professional service – information is accessible 24:7 on an online registry. This is no doubt one of the many contributing factors, why in the past years, the Maltese registry of companies, has registered strong and robust growth, often north of double digits over the previous years.
Speed of incorporation / issuance of certificates
Another common lament by investors are time delays to ensure swift incorporation of the company. Investors must ensure that they are able to deploy a quick-fire solution to meet time-deadlines or investment windows, all of which may be lost if the incorporation process is unnecessary protracted in time.
Once the mandatory due diligence procedures have been met, a Maltese company can be incorporated in less than 24 hours. Copies of the certificate of incorporation and copies of the Memorandum and Articles of Association are typically available within 48 hours from incorporation.
One of the reasons for the speed of this incorporation is that the corporate statute – the Memorandum and Articles of Association is essentially a private agreement, which does not require any notarial processes.
Furthermore, whilst the Memorandum and Articles of Association must be submitted in original by the original subscribers, the latter may provide a power of attorney (scanned copy will suffice) appointing a resident officer to undertake the subscription of the Memorandum and Articles of Association. The attorneys typically appointed are trust partners and directors of our firm, all of which are personal warrant holders and highly experienced in this role.
This speed factor is also evident in the name reservation process (applications are processed online via a secure registry access) and typically provided within 24 hours. Likewise, original certificates such as copies of certificates of incorporation and good standing certificates can be issued within 48 hours from request thereof.
This places the Maltese company as a significant advantage compared to its jurisdictional rivals, giving it an inevitable competitive edge.
Another important consideration that any investor should consider is the ease (speed, costs and procedural time-frames) within which to undertake changes to the company, if and when necessary.
Companies are not static entities – they are embodied with a separate legal personality, and for this reason, changes shall be necessary throughout the course of their corporate life. Changes can include changes to the authorised and issued share capital (increases or decreases), changes to the registered address, changes in the officers within the company (directors and company secretary), name of the company, name of shareholders etc;
It is therefore important to ascertain that if these changes are rendered necessary, they may be undertaken, in the swiftest and most time-efficient method possible. In this respect, the Maltese company also scores very highly. Virtually all of the aforesaid changes may be carried out by written resolution or extracts of minutes by the two organs of the company – the general meeting (shareholders) and the directors. Once authorised by the competent organ within the company, the change is effective vis-à-vis third parties, through the filing of bespoke registry forms. There is no need for any notarial authentication to render the change effective, meaning that barring few exceptions (tied to the reduction of the issued share capital in some cases, allotment of new shares for non-cash consideration, mergers and liquidation, amongst others), changes may be rendered effective within less than 24 hours from filing thereof.
Companies are not static entities – they are ever-evolving and must meet the challenges of the times, be them of a compliance nature or of an investment nature. The promoters will surely find solace on the fact that Maltese companies are extremely versatile, and are able to ‘change skin’ with relative ease and speed. It is for example perfectly possible for a Maltese company to effect any of the following changes within a 24-48 hour period – (change of name; increase to the authorised and issued share capital). Even pivotal changes to the company, such as the change to the status of the company, such as change from private exempt to private limited liability company or from private to public companies and vice-versa may be effected within a short time-frame.
Quality Professional Services
Undoubtedly, fiscal advantages and wide scope of use are very important factors for investors in determining the jurisdiction in which they shall form the company. However, equally important is the quality of the service provider and the maturity of the industry in general.
The ability to communicate with the corporate service provider in clear and unequivocal terms, and having the back of a reputable, knowledgeable yet investor-friendly investor are also highly important.
In this respect, it is important to note that the Maltese system has a solid track record, drawing strong inference from the Companies Act of England and Wales. Financial services now constitutes one of the main pillars of the Maltese economy, with a solid base of professionals, who are typically bi-lingual or tri-lingual. English is the official language in Malta, on par with Maltese, whilst French, Italian, Spanish and German are widely spoken.
Strategically located in the middle of the Mediterranean, and with daily connecting flights to major capital, Malta is three hours away from London, two from Paris and Frankfurt, slightly over on hour from Rome and four hours from Stockholm and Moscow, ensuring a swift reach to major financial hubs.
Our firm has a strict 24 hour response policy and draws on the experience of its partners, all highly experienced warrant holders. Our team is conversant in several languages, and shall be glad to reply to all your queries.
Tried and Tested Legislation
One of the reason for the continuing successes of a Maltese company, are that it draws heavily on the precepts of the Companies Act of England and Wales, particularly the 1985 Companies Act. This ensures that whilst its ‘genetic pool’ is widely respected, and effectively often seen as ‘the benchmark’ of corporate regulation and rules, it is also familiar and intuitive to investors.
Concepts such as ordinary and extraordinary resolutions, company secretarial services etc; are used profusely, with little or no variations across the wide Commonwealth belt, and not only that, ensuring that investors can feel confidence drawing analogies to jurisdictions in which they may be more familiar with.
In terms of interpretation, although there is no system of ‘legal precedents’ and Maltese courts are not bound by the judgments passed by previous courts of law, Common Law is an important source of interpretation. Maltese courts will often refers to Common Law precepts, when asked to interpret corporate law, thereby ensuring that they can draw on a large plethora of legal principles.
Effective Asset Protection Tool
Often overlooked, but one of the main reason for forming a company is precisely to draw comfort from the fact that the formation of a company gives rise to a separate legal entity, distinct from that of the subscribers themselves.
Effectively companies are deemed to be ‘legal persons’ – which have their own liabilities, responsibilities and life. A Company can sue or be sued, and can hold, acquire, and dispose of property of any form or designation.
As long as the precepts of correct corporate governance are preserved, shareholders cannot be held responsible for the liabilities of the company, or vice versa. If anything the very principle of a limited liability company, is to set the liability of its shareholders, this being limited to the portion of unpaid capital, if any, within the company.
Barring exceptions, typically tied to unfair and malicious practices, intended to manifestly and willing defraud or to prejudice creditors, creditors cannot call upon the shareholders to make good the liabilities of the company, beyond the portion of unpaid capital.
Likewise, a shareholder may be subject to legal proceedings of a purely civil and personal nature, with no effect at all on the company in which he holds an equity participation.
The principle of separate legal personality is therefore very important as asset protection tool. The property held by the company are distinct from those of the shareholder. The company may acquire, hold and dispose of property held by it, in any form or manner.
Although, there are other forms of asset protection tools, such as foundations and trusts (institutes in which the staff of our firm is strongly proficient) and is authorized to act as administrators of foundations and trustees in trusts, the humble company also remains an effective asset protection tool, both as a standalone structure, and also in conjunction with the institutes of foundations and trusts (e.g. corporate founders / settlors and beneficiaries) all possible.